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New Exclusions Process Opens Up Potential Relief from Section 232 Tariffs for Users of Specialty Steel and Aluminum Products or Companies that Serve National Security Needs

26 March 2018 Legal News: Government Enforcement Defense & Investigations

On March 23, steel and aluminum users were confronted with new special tariffs of 25 percent on all imports of steel and tariffs of ten percent on all imports of aluminum, with temporary exclusions for Argentina, Australia, Brazil, Canada, Mexico, the member countries of the European Union, and South Korea.1 These measures created a great deal of uncertainty for consumers of these products. To help address fears of shortages, the Department of Commerce has now announced an exemptions process. Pursuant to the new exclusions process, companies can seek exclusions where: (1) steel and aluminum products are not available domestically; (2) domestic production is insufficient to satisfy domestic consumption; or (3) specific national security needs otherwise require an exemption.

It is highly likely that there will be a flood of exclusion requests. To help steel consumers navigate this new exclusions process, this Client Alert lays out the specific requirements of the exemptions process. It also provides details regarding alternative ways that companies can cope with these large new tariffs if they are not likely to be able to secure an exclusion of their imported products.

Developments are moving quickly in this area. As the details of how these tariffs will be implemented unfold, additional questions and uncertainties will arise. Attorneys in Foley & Lardner’s International Trade & National Security practice are monitoring developments closely. Further information is available by contacting the authors.

The responses to the major questions surrounding the section 232 exclusions process are as follows:

How the Exclusions Process Functions

What was announced?

The Department of Commerce issued an exclusion process. It consists of two parts: (1) a Federal Register notice explaining the process (https://www.gpo.gov/fdsys/pkg/FR-2018-03-19/pdf/2018-05761.pdf); and (2) an exclusions submission form (tailored for steel and aluminum (https://www.bis.doc.gov/index.php/232-steel) and (https://www.bis.doc.gov/index.php/232-aluminum).

Who may make a filing?

The exclusions process is limited to “parties in the United States,” i.e., “[o]nly individuals or organizations using [steel or aluminum] articles … in business activities … in the United States may submit exclusion requests.” The rationale is that consumers are the entities that “contribute to [the] economic welfare through business activities in the United States.” Foreign steel and aluminum makers, and other entities that do not consume these products may not file because “[a]llowing individuals or organizations not engaged in business activities in the United States to seek exclusion requests could undermine the adjustment of imports that the President determined was necessary to address the threat to national security posed by the current import” of steel and aluminum.

Who is the decision-maker?

Decisions regarding exclusions are to be made by the Bureau of Industry and Security, which is the entity that generally oversees the Export Administration Regulations (export controls on commercial/dual use products).

What is the role of the domestic steel and aluminum industries?

The U.S. industries may object, and submit rebuttal information, within thirty days of the placement of the exclusion request on the U.S. exclusions website. Any individual or entity objecting needs to “provide factual information on the production capabilities at steel or aluminum manufacturing facilities that they operate in the United States; the availability and delivery time of the products that they manufacture relative to the specific steel or aluminum product that is subject to an exclusion request; and discussion on the suitability of its product for the application or applications identified by the exclusion requestor.”

It is unclear at this point whether the Department of Commerce will basically defer to U.S. industry objections (as occurs in the antidumping and countervailing duty context) or whether it will give a probing review to the claims of each side and whether the record, as a whole, supports an exclusion for the three enumerated bases.

What are the key considerations for granting or denying an exclusions request?

Exclusion requests are granted, “as appropriate,” for the “import of goods not currently available in the United States in a sufficient quantity or satisfactory quality, or for other specific national security reasons.” No other basis exists granting an exclusion request. The first two categories are intended to encompass situations where the U.S. industry cannot benefit from an exclusion. The last one is intended to deal with situations where the consumer manufactures goods that have a national security impact (e.g., defense articles or critical infrastructure).

What about the country exclusions?

The pace of change for country exclusions has been dizzying:

  • Originally, the section 232 announcement contained no exclusions, adopting the Department of Commerce option of a global tariff on all products.
  • A few days later, there was an announcement of potential exclusions for Canada and Mexico, followed by Australia.
  • On March 22, the White House announced exclusions for Argentina, Australia, Brazil, Canada, Mexico, the member countries of the European Union, and South Korea.2 These exclusions last only until May 1, 2018. The White House announcement stated that the U.S. Government would be carefully monitoring imports of steel and aluminum from the exempted countries to determine if quotas might be needed (i.e., if the listed countries take advantage of the temporary exclusions to increase exports to the United States).
  • Finally, the U.S. and Korean governments announced a deal for the exclusion of 2.68 million tons of Korean steel per year (about 70% of the average for the period 2015 to 2017) from the steel tariffs in exchange to changes to the U.S.-Korea Free Trade Agreement (KORUS) related to auto safety standards and pickup trucks. Basically, South Korea decided that it would rather have fewer sales (at the new, higher prices prevailing in the U.S. market) than pay a 25 percent tariff (which would also likely be at lower volumes). This quota deal may become a template for other countries to follow.

Illustrating the new international trade environment brought about by the section 232 process, even the Korean announcement brought more trade risks and uncertainty. There are still many questions about how this quota will work, including who will get the steel, whether it will be administered by the Korean Government, how quotas will be administered, which steel companies in Korea will get the quotas, how those Korean steelmakers, will decide which customers to serve and which to cut off, and so forth.

How to Make an Exclusions Filing

Can confidential information be submitted to support or rebut an exclusions request?

Generally, no. Exclusion requests will be released to the public and confidential information “should not be provided.” If submitters have “proprietary or otherwise business confidential information that they believe relevant to the Secretary’s consideration” then the company should so indicate, but not provide the information in the exclusions request.

What is the key information that should be supplied?

The information to be submitted primarily is found in a form (located here: https://www.regulations.gov/document?D=BIS-2018-0006-0001). These forms and supplements are “primarily focused on the availability of the product in the United States,” with information about availability of the product abroad only being tangentially important to the extent it illuminates U.S. national security considerations. The submission must “clearly identify, and provide support for,” the argument that the “article is not produced in the United States in a sufficient and reasonably available amount, is not produced in the United States in a satisfactory quality, or for a specific national security consideration.” No more than 25 pages of support can be provided, both by the initial request and for any rebuttal.

BIS has not announced the standard it will use to review submissions. It is highly likely, however, that exclusions will only be granted based upon strong evidence supporting the claim that the product is not available domestically/available in sufficient quantities or that there is a specific nationals security rationale for a claimed exemption. Companies that are providing exclusion requests need to consider carefully what type of support they can submit to distinguish their submissions from the flood of other submissions. Strong support for any claimed need for an exemption will likely be the key to securing a favorable exclusion decision.

How are exclusion requests filed?

Exclusion requests must be in electronic form and are to be submitted at www.regulations.gov.

What is the timing for any objection?

Objections are to be submitted “no later than 30 days after the related exclusion request is posted. Objections should provide support for the opposition, while referring to the specific support provided in support of the original exclusion request.

How long does it take to evaluate exclusions?

The exclusions process will “normally” not exceed ninety days. It remains to be seen how many exclusion requests BIS will receive and whether it will have the resources to meet this stated goal of a ninety-day turnaround.

What Will Exclusions Look Like?

On what basis will exclusions be granted?

Exclusions will be made on a product basis, based on the physical characteristics of the excluded products.

Who can use any granted exclusions?

Exclusions will generally be issued only to the “individual or organization that submitted the specific exclusion request, unless Commerce approves a broader application of the product” to apply to additional importers. Exclusions generally will not be issued in blanket form. In other words, if Consumer A receives an exemption for a given product, Consumer B will not be able to rely on that exclusion, even if it is importing the same type of steel.

There are procedures for minimizing the work created by numerous customers requesting the same exclusion. Follow-on requesters can reference exclusion requests already approved, as “[o]ther individuals or organizations that wish to submit an exclusion request for a steel or aluminum product that has already been the subject of an approved exclusion request may submit an exclusion under this supplement.”

How long will exclusions last?

In most cases, BIS will issue for one year.

When do exclusions become effective?

Exclusions are effective five days after they are published on regulations.gov.

If an exclusion is turned down, can it be resubmitted?

BIS will consider a new exclusion if it provides “new or different information in an attempt to meet the criteria for approving an exclusion request for that product.” Unless the submitter submits significantly new information, it is unlikely BIS will reconsider its earlier denial.

The Repercussions of the Section 232 Announcement

How long will section 232 tariffs last?

There is no time limit under the law. The President has discretion and can decide how long the tariffs will last. President Trump himself has vowed that relief will be put in place “for a long period of time.” Whether this will be carried out depends on the results of the inevitable court and WTO challenges. The closest analogue to this situation – the safeguard steel remedies that were put in place in 2002 by the Bush Administration – lasted only around eighteen months, as they were struck down by a WTO panel. The Bush Administration thereafter revoked the duties, due as much to the desire to end retaliation by foreign governments (which imposed large tariffs on unrelated U.S. products) as it was a desire to end the WTO challenge.

What will be the impact on antidumping and countervailing duty tariffs already in place? Will it impact new case filings?

The United States currently has 169 anti-dumping and countervailing duty orders in place for steel (29 of which are against China, which is estimated to have the majority of the world’s excess steel production capacity).

It is unclear how the U.S. steel industry will respond. Reportedly, the industry has prepared antidumping and countervailing duty petitions on additional steel products, but was holding back on filing them pending the release of the section 232 results. There is still an incentive for the U.S. industry to file these actions, especially if they have taken the costly step of preparing petitions. As noted above, the lifespan of any section 232 relief is unknown. The earlier safeguard action on steel lasted only eighteen months. Antidumping and countervailing duty actions, by contrast, are countenanced by the WTO and generally last for fifteen years or longer. (While they can be sunsetted every five years, this hardly ever happens until the third review or later.) Thus, there is every incentive to still file antidumping and countervailing duty cases, which offer prospects for long-standing relief.

Achieving success in such filings, however, may be harder to achieve. The presence of the section 232 relief will make it harder to win these cases. In order to achieve an antidumping or countervailing duty order, the U.S. industry must show that it is suffering “material injury” that is “by reason of” the subject imports or that the subject imports “threaten” the U.S. industry with “material injury.” This determination is made by the International Trade Commission (ITC). The presence of uniform tariffs of 25 percent on imports is going to make material injury arguments more difficult to make at the ITC.

Will there be an international trade war?

The war has already begun. Antidumping and countervailing duty actions were up nearly fifty percent in the first year of the new administration. The President has chosen international trade hardliners to form the core of his international trade team. NAFTA is being renegotiated, with the U.S. Government pushing for strong regional content rules and other initiatives that would tilt the balance of trade against imports from Mexico. KORUS (the free trade agreement with Korea) is soon to follow. And in the area of foreign investment in the United States, the Trump Administration already has used the CFIUS (Committee on Foreign Investment in the United States) process to reject several high-profile investments in the United States, turning the CFIUS process into a de facto form of industrial policy for investments in U.S. firms by foreign companies where there is a potential U.S. national security interest.

Concerns about a potential trade war were only exacerbated by events over the weekend. The EU listed potential targets for retaliation, as did other countries. President Trump doubled down on his declaration that a trade war would be “easy to win,” stating that he would target automobiles from the EU if there was any retaliation against any U.S. goods in the wake of the section 232 announcement.

In short, the section 232 tariffs are best viewed as the newest battlefront in the international trade war. The difference with the earlier battles is that this is one where the other countries are going to make a stand and start to fight back.

How can companies cope with the new international trade environment?

The section 232 announcement is but one part of an ongoing push by the administration to block what it believes is unfair trade. With the number of antidumping and countervailing duty actions rising by nearly fifty percent in the first year of the Trump administration, companies that rely on imported goods need to be aware of the potential disruption of their international supply chains. At the same time, companies that believe that they are the victims of unfair trade have more tools available than ever before to combat perceived unfair trade. Both topics are covered below.

What can companies do that believe they are potential targets for international trade remedy proceedings?

Automobiles and automotive parts have been the subject of antidumping and countervailing duty actions. These actions have been brought on entire vehicles, such as mini-vans from Japan, and on individual parts, such as tires. The decision as to whether to bring a case is within the discretion of the U.S. industry producing a given product. Even where a case is self-initiated by the U.S. government, it generally proceeds with the support of the U.S. industry.

It is not uncommon for importers of a product who have not prepared a contingency plan to find themselves stuck when a case is filed, particularly if they are contractually obligated to continue to purchase the foreign product despite the prospect of sharply higher duties. Here are some precautionary steps companies worried about being ensnared in a potential trade action can take:

  • Monitor Import Statistics and Trade Rumors. Sometimes, trade filings come out of nowhere, through the filing of a petition that was impossible to predict. In many cases, however, there are signs a case is coming – industry rumors, articles in industry publications, or trade patterns compatible with a finding of material injury “by reason of” imports of a given product. Cases are especially likely to be filed when imports from key foreign countries are increasing, when average unit values for such products are declining, and when the U.S. industry is suffering from declining profitability or increasing losses. Especially for industries where trade remedy filings are common, it can be useful to pay attention to trends that potentially indicate the filing of an action. Data regarding import trends, including the average unit value of imports and the quantity of imports, broken down by country and Harmonized Tariff System classification, is available on the ITC Dataweb website.3
  • Evaluate When Acting As Importer of Record. Although trade remedy actions are aimed at foreign manufacturers and exporters, the duties imposed actually are collected from the importer of record as a percentage of the ad valorem (value) of each entry of the subject merchandise. Importers who are not paying attention to the release of new orders can find they have inadvertently imported goods now subject to extra duties – in some cases, at rates that exceed the value of the good itself (i.e., where duty rates exceed 100 percent). Companies need to be aware of contractual arrangements where they have agreed to be the importer of record, particularly for goods like iron and steel products where trade filings are common.
  • Establish Contingency Measures in Long-Term Supply Agreements. Companies highly reliant on imported goods need to evaluate whether their long-term contracts cover the contingency of which party acts as the importer of record, the delivery terms (terms of delivery like CIF and FOB can impact who is responsible for paying for duties), whether reimbursement of duties occurs, whether the possibility of increasing tariffs is even addressed, and whether the parties have the right to terminate the contract based upon the imposition of unanticipated duties. Force majeure clauses may not meet legal requirements for contract termination on the basis of unanticipated duties.
  • Check Entries Carefully Against Orders. As noted, every time a new trade remedy is imposed, there are always importers surprised by the unanticipated duties. Relying on customs brokers or freight forwarders to handle this situation often can be inadequate, as these third parties generally are not given the responsibility of knowing what products are planned for importation. Once the goods have reached the customs territory of the United States, it is too late to do anything because duty drawback is not available for antidumping and countervailing duties. It also is not uncommon to have customs brokers miss the imposition of new antidumping or countervailing duties, even though this task does fall within their contractual responsibilities. Because the liability of customs brokers is generally limited by contract to the modest value of the fee paid for the processing of the goods, companies should take steps to independently follow which goods become subject to new orders as part of their customs compliance.
  • Know the Correct Classification of Entries. Duties are imposed based upon the physical description of the merchandise, not the HTS classification, which is given for convenience only. If Customs determines goods should have been declared to be subject to an antidumping duty order, it will impose the duties even if the HTS classification declared or believed to be true indicated otherwise. In any situation where entries are in a gray area, special attention should be paid to get the classification correct and determine whether the good falls within the scope of the order. Some orders have complicated scopes that can make classification, such as the aluminum extrusions order (which is the subject of approximately eighty scope determinations by the DOC). If certainty is not possible through self-classification, importers should consider filing a request for a scope ruling, which results in the DOC issuing a definitive ruling as to whether the goods are within the scope of an order.
  • Be Aware of Potential Circumvention Red Flags. Because duty rates can be high, some less scrupulous exporters will misclassify their goods, such as by claiming different product attributes or classifications than in fact exist, by claiming an erroneous country of origin, or otherwise. Duties are paid, however, by the importer of record not the manufacturer. Any importer noticing red flags that indicate potential circumvention should check into it before CBP does.
  • Establish a Monitoring System and Vigorously Participate in Administrative Reviews. Foreign companies that export subject merchandise need to be especially careful. Under the DOC rules, the two largest foreign exporters generally are chosen to be “mandatory respondents” in administrative reviews. Administrative reviews are conducted annually and involve the submission of new data by the foreign producer to reset the antidumping or countervailing duty margins. Sophisticated foreign companies operating under an order can construct detailed monitoring systems that allow them to sell at close to non-dumped prices in the United States, thereby allowing them to maintain or even lower the operative antidumping margin assessed against their entries.
  • Conduct a Risk Assessment Review of Critical Supply Contracts that May Be Impacted. Work with the company’s sales and procurement teams to identify key long-term contracts and purchase orders that will be impacted by the tariffs. Specific contract terms that should be examined include provisions that pertain to: (a) raw materials increases and any applicable pricing formulas; (b) other requests for cost increases; (c) force majeure; (d) notice requirements; and (e) termination rights.
  • Investigate Alternative Sources of Supply. If a critical supplier threatens to cease supply absent price increases or seeks to terminate the contract, the company will need to act quickly to ensure a continuity of supply. If there are alternate sources available, the company many work to line up and qualify a replacement supplier. However, this many not be feasible if the goods are specially manufactured products that require testing and a lengthy validation process. The company should ascertain how much product it has in stock and identify when an interruption in supply would cause a shutdown in the manufacturing line. The company can then determine whether its best course of action is to acquiesce to the demand for price increases or refuse and proceed with qualifying an alternate supplier. Even if the company does decide to pay higher costs for the products (whether by paying the existing supplier a premium or by finding an alternate supplier), the company should do so with a full reservation of rights, solely as an act of cover, to mitigate its damages, and prevent any interruptions in the supply chain. The company should take all steps necessary to document its position regarding any request for price increases and reserve all of its rights under the parties’ contract.

What can companies who believe they are victims of unfair trade do?

The aggressive tariffs for steel and aluminum are understandably drawing a lot of notice as a new tool to fight perceived unfairly traded imports. In January of 2018, Energy Fuel Resources (USA) Inc. and Ur-Energy USA Inc. filed a petition requesting a national security finding and measures to halt imports from Russia, Kazakhstan, China, and Uzbekistan. Reportedly the Department of Commerce is reviewing other industries where section 232 potentially could be applied, with a focus on semiconductors/integrated circuits, aircraft, and shipbuilding. Other industries with an arguable national security argument are likely to give section 232 new consideration, as well as considering tried and true international trade remedies like antidumping and countervailing duty petitions.

For companies without a national security hook, there are still are potential international trade remedies available. The options for companies that believe they are being hurt by unfair trade varies depending on whether the good already is covered by an order or whether the producer is contemplating bringing a new action. For products covered under existing orders, constant vigilance regarding whether foreign competitors are taking steps to circumvent orders is necessary. Some common ways in which circumvention occurs is by mismarking the country of origin, transshipping goods through third countries, conducting minor processing of goods in a third country and claiming the good was substantially transformed and became a product of the third country, and shipping components into the United States for only minor assembly in so-called “screwdriver” factories. In some cases, companies have added trace amounts of nonessential components to try to take a product just slightly outside of the scope of the relevant order.

Monitoring this kind of activity is important for companies looking to capitalize fully on increased tariffs intended to diminish foreign competition. Information regarding imports can be gotten for a fee from commercial services, such as PIERS. If it appears duties are not being appropriately paid, this can be brought to the attention of the DOC through a request for an anti-circumvention inquiry.

An additional option recently opened up is a new law that gives U.S. producers a strong tool to prevent circumvention of orders through the grant to CBP of heightened authority to investigate allegations that foreign exporters are evading antidumping and countervailing orders. Under the new law, U.S. producers, wholesalers, and unions (among others) of the same or similar products covered by antidumping and countervailing duty orders can file an allegation that an importer has entered the merchandise subject to the order through evasion. CBP even provides a website to report such concerns.4 The law allows the DOC and the ITC to submit evidence of evasion as well. CBP is then required to investigate the allegation to determine its accuracy.

A final tool to consider is the False Claims Act, which is a way by which private persons can file a claim, on behalf of the U.S. government, alleging the U.S. government is being deprived of revenue due to the circumvention of orders. If such circumvention is determined to exist, the result can be penalties two or four times the duties, taxes, and fees of which the United States was deprived, or equal to the domestic value of the imported merchandise. Liability for treble damages and penalties ranging from $10,781 to a maximum of $21,563 per violation are also available. With duties potentially running into the triple-digit range, the amount of potential duties can quickly rise. In addition, whistleblower provisions may allow the recovery of up to 30 percent of any recovery made by the government, depending on whether the government intervenes to take over the case. If it does, the ongoing work from the whistleblower is low, as the case will be prosecuted to its end by the government, with the whistleblower potentially receiving a large bounty at the conclusion of the investigation.

Where products are not covered by an existing order, for all the reasons listed above the environment probably has never been more receptive for companies seeking import relief. This topic is covered below.

How can U.S. companies tell if they have a good case they should consider bringing?

Despite the surprising new use of section 232, the most common forms of trade remedy by far are antidumping and countervailing duty actions. These cases generally are initiated after a detailed petition is filed by manufacturers, producers, or wholesalers in the United States of the same or similar products; by a certified union or recognized union or group of workers in the United States of the same or similar products; by a trade or business association whose members manufacture, produce, or wholesale the same or similar products in the United States; or by an association of these groups.

Preparing a petition is a lot of work. The petition must contain detailed submissions relating to the existence and amount of dumping and/or subsidization, the identities of known manufacturers and importers, and copious information regarding how subject imports allegedly have harmed U.S. producers of the domestic like product. One advantage of the process, however, is a draft petition can be submitted in advance of filing to both the DOC and the ITC, which will follow up with detailed comments and requests for information to fill in any perceived gaps in the petition. This is a huge advantage, akin to a company being able to provide an advance copy of its brief to a judge for comments regarding the strengths of the arguments.

The determination as to whether a case should be brought is a complicated one, and depends on close evaluation of the level of imports, their pricing, trends in import quantities and their pricing, and other factors bearing on whether there is a case for material injury or the threat thereof. Detailed information also needs to be provided regarding the potential antidumping duty margin, which is evaluated at the DOC.

Further information, including a questionnaire designed to help evaluate the strength of a potential antidumping case, is available by contacting Greg Husisian at ghusisian foley.com or +1 202.945.6149 or Bob Huey at rhuey foley.com or +1 202. 202.295.4043.

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Greg Husisian and Bob Huey are members of the Foley International Trade & National Security Practice and are able to help companies looking to file or support exclusion requests. These authors also have an international trade remedy assessment toolkit available. This toolkit is designed to help U.S. companies assess whether they have a viable case to consider bringing. Further information about this Client Alert or other international trade topics is available by contacting Greg Husisian at ghusisian@foley.com or +1 202.945.6149 or Bob Huey at rhuey@foley.com or +1 202. 202.295.4043.

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1 Full details on the implications of the section 232 tariffs on the steel and aluminum markets in general, and for the automotive sector in particular, are found here (https://www.foley.com/us-manufacturers--and-foreign-steel-and-aluminum-companies--face-catastrophic-duties-and-international-trade-risks-following-announcement-of-unprecedented-section-232-tariffs-on-steel-and-aluminum-03-05-2018/ and https://www.foley.com/the-automotive-sector-faces-sharply-increased-duties-pricing-uncertainty-following-announcement-of-section-232-tariffs-on-steel-and-aluminum-03-08-2018/).

2 Full details on the implications of the section 232 tariffs on the steel and aluminum markets in general, and for the automotive sector in particular, are found here (https://www.foley.com/us-manufacturers--and-foreign-steel-and-aluminum-companies--face-catastrophic-duties-and-international-trade-risks-following-announcement-of-unprecedented-section-232-tariffs-on-steel-and-aluminum-03-05-2018/ and https://www.foley.com/the-automotive-sector-faces-sharply-increased-duties-pricing-uncertainty-following-announcement-of-section-232-tariffs-on-steel-and-aluminum-03-08-2018/).

3 See ITC Dataweb, https://dataweb.usitc.gov/scripts/user_set.asp.

4 See Customs & Border Protection, “e-Allegations,” https://eallegations.cbp.gov/Home/Index2.